A PROJECT REPORT ON FINANCIAL RATIO

ANALYSIS OF MAHINDRA N MAHINDRA LTD.

BACHELOR OF MANAGEMENT STUDIES

SEMESTER V

SUBMITTED

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

FOR THE AWARD OF DEGREE OF BACHELOR OF
MANAGEMENT STUDIES

BY

MISS. MAMTA SURESH KOLSUMKAR

ROLL NO. 26

SATHAYE COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE (EAST)
MUMBAI 400 057

DECLARATION
I, MISS. MAMTA SURESH KOLSUMKAR, the student of T.Y.B.M.S.
Semester V

(2016 2017) hereby declare that I have completed the project on

A PROJECT REPORT ON FINANCIAL RATIO ANALYSIS OF MAHINDRA

N MAHINDRA LTD . The information submitted is true and original to the best
of my knowledge.

_____________
Miss. Mamta Kolsumkar
Roll No. 26
Sathaye College Of Commerce
Dixit Road, Vile Parle (East),
Mumbai 400 057

CERTIFICATE
This to certify that MISS. MAMTA KOLSUMKAR, roll no. 26 of third
year B.M.S., Semester V (2016 2017) has successfully completed the project on
RATIO ANALYSIS OF MAHINDRA N MAHINDRA LTD. under the guidance
of Prof. Akash Desai.

Course Co-ordinator

Principal

Prof. Shashank Pai

Dr. Kavita Rege

Project Guide:
Prof. Akash Desai

External Examiner:

ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and
fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me
chance to do this project.
I would like to thank my Principal, Dr. Kavita Rege for providing the
necessary facilities required for completion of this project.
I take this opportunity to thank our Co-ordinator, Prof. Shashank Pai and
Assistant Co-ordinator, Prof. Shruti Naik for their moral support and guidance.
I would also like to express my sincere gratitude towards my Project
Guide, Prof. Akash Desai whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various
reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or
directly helped me in the completion of the project especially my Parents and
Peers who supported me throughout my project.

TABLE OF CONTENTS

EXECUTIVE SUMMARY

CHAPTER 1 - INTRODUCTION
1.1 : Meaning of Ratio Analysis :

Ratio analysis is the process of determining and interpreting numerical

relationships based on financial statements. A ratio is a statistical yardstick that
provides a measure of the relationship between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are
simple to calculate and easy to understand. The persons interested in the analysis
of financial statements can be grouped under three heads :
a) Owners or investors
b) Creditors
c) Financial executives.

1.2 : Importance and Advantages of Ratio Analysis :

Ratio analysis is an important tool for analyzing the companys financial
performance. The following are the important advantages of the accounting ratios :
a) Analyzing financial statements :
Ratio analysis is an important technique of financial statement analysis.
Accounting ratios helps in understanding the financial position of the company.
Different users use ratios to analyze the financial situation of the company for
their decision making process.
b) Judging efficiency :
Accounting ratios are important for judging the companys efficiency in terms
of its operations and management.
c) Locating weakness :
Accounting ratios can also be used in locating weakness of the companys
operations even though its overall performance may be quite good.

Management can then pay attention to the weakness and take remedial
measures to overcome them.
d) Formulating plans :
Accountiong ratios can also be used to establish future trends of its financial
performance. As a result, they help in formulating the companys future
plans.
e) Comparing performance :
It is essential for a company to know how well it is performing over the
years and as compared to other firms of the similar nature. Besides, it is
also important to know well its different divisions are performing among
themselves in different years. Ratio analysis facilitates such comparison.

1.3 : Classification of Ratios :

a)

Liquidity Ratios :
Liquidity ratios measures a companys ability to pay debt obligations and its
margin of safety through calculation of the ratios. Liquidity ratios are an
indicator of whether a companys assets will be sufficient to meet the
companys obligations when they become due.

I.

Current ratio :
The current ratio is a liquidity ratio that measures a companys ability to
pay short term and long term obligations. The current ratio considers
the current total assets of a company relative to that companys current
total liabilities.
The formula for calculating a companys current ratio is :

Current ratio = Current assets / Current

liabilities
A higher current ratio is always more favorable than a lower current ratio
because it shows the company can more easily make current debt
payments.
II.

Quick ratio :
The quick ratio is an indicator of a companys short term liquidity. The
quick ratio measures a companys ability to meet its short term obligations
with its most liquid assets.
The formula for calculating a companys quick ratio is :
Quick ratio = Liquid assets / Current
liabilities
Higher quick ratios are more favorable for companies because it shows
there are more quick assets than current liabilities.

b)

Long Term Solvency Ratios :

The solvency ratios indicates whether a companys cash flow is sufficient
to meet its short term and long term liabilities. The lower a companys
solvency ratio, the greater the probability that it will default on its debt
obligations.

I.

Debt equity ratio :

Debt equity ratio is a debt ratio used to measure a companys financial
leverage, calculated by dividing a companys total liabilities by its
stockholders equity.
The formula for calculating debt equity ratio can be presented in the
following way:

Debt equity ratio = Total liabilities /

A lower debt to equity ratio usually implies a more financially stable
business. Companies with a higher debt to equity ratio are considered as
more risky to creditors and investors than companies with a lower ratio.
II.

Proprietary ratio :
The proprietary ratio measures the amount of funds that investors have
contributed towards the capital of a firm in relation to the total capital that
is required by the firm to conduct operations.
The formula for calculating a firms proprietary ratio is :
Proprietary ratio = Shareholders funds /
Total assets
Higher proprietary ratio indicates that the company has enough capital to
repay its creditors and lower ratio indicates that the company is not in a
position to pay all of its creditors.

III.

Interest coverage ratio :

The interest coverage ratio

is debt ratio and profitability ratio used to

determine how easily a company can pay interest on outstanding debt.

The formula for calculating interest coverage ratio is :
Interest coverage ratio = EBIT / Interest expenses
c)

Activity / Efficiency or Current Assets Movement Ratios :

Activity ratios measure a firms ability to convert different accounts within
its balance sheets into cash or sales. Activity ratios measures the relative

efficiency of a firm based on its use of its assets, leverage or other such
balance sheet items.
I.

Inventory turnover ratio :

Inventory turnover ratio shows how many times a companys inventory is
sold and replaced over a period of time.
The formula for calculating inventory turnover ratio is :

Inventory turnover ratio = Cost of goods sold / Avg. inventory cost

II.

Debtors turnover ratio :

Debtors turnover ratio is an accounting measure used to quantify a firms
effectiveness in extending credit and in collecting debts on that credit.
Debtors turnover ratio is an activity ratio measuring how efficiently a firm
uses its assets.
The formula for calculating debtors turnover ratio is :
Debtors turnover ratio = Net credit sales /
Average
accounts receivables
Higher ratios mean that companies are collecting their receivables more
Frequently throughout the year.

III.

Creditors turnover ratio :

Creditors turnover ratio is a short term liquidity measure used to quantify
the rate at which a company pays off its suppliers.
The formula for calculating creditors turnover ratio is :
Creditors turnover ratio = Net annual credit
purchase /
Average trade

A higher ratio shows suppliers and creditors that the company pays its
bills frequently and regularly.

IV.

Working capital turnover ratio :

The working capital turnover ratio measures how well a company is
utilizing
its working capital to support a given level of sales.
The formula for calculating working capital turnover ratio is :
Working capital turnover ratio = Sales or
Cost of sales /
A higher turnover ratio indicates that management is being extremely
efficient in using a firms short term assets and liabilities to support sales.

d)

Profitability Ratios :
Profitability ratios measures how well a firm is performing in terms of its
ability to generate profit. These ratios assess the ability of a company to
generate earnings, profits and cash flows relative to some metric, often the
amount of money invested.

I.

Gross profit ratio :

Gross profit ratio is a profitability ratio that shows the relationship between

gross profit and total net sales revenue. It is a popular tool to evaluate
the operational performance of the business.
The formula for calculating the gross profit ratio is :
Gross profit ratio = Gross profit / Net
sales * 100
Gross profit ratio indicates to what extent the selling price of goods per
unit may be reduced without incurring losses on operations.
II.

Net profit ratio :

Net profit ratio is the popular profitability ratio that shows relationship
between net profit after tax and net sales.
The formula for calculating net profit ratio is :
Net profit ratio = Net profit after tax / Net
sales * 100
A high net profit ratio indicates the efficient management of the affairs of
the business.

III.

Operating profit ratio :

Operating profit ratio helps in determining the ability of the management
in running

the business. Operating profit ratio is the percentage of

operating profit relative to the revenue earned during a period.

The formula for calculating operating profit ratio is :

Operating profit ratio = Operating profit / Net sales * 100

Generally, a higher operating profit ratio is desirable as it suggests greater

potential to derive profits and more cushion against any increase in
competiton or costs.
IV.

Operating expenses ratio :

The operating expenses ratio is a measure of what it costs to operate a
piece of property compared to the income that the property brings in.
The formula for calculating operating expenses ratio is :

Operating expenses ratio = Operating expenses / Gross income * 100

A lower operating expenses ratio indicates a greater profit for the investors
and higher operating expenses ratio indicates a lower profit for the
investors.

e)

Earnings Ratios / Overall Profitability Ratios :

Overall profitability ratios indicates the relationship between the profits of a
firm and investment in the firm. In overall profitability ratios, profit is
used as yardstick to measure the profitability of any business concern.

I.

Return on assets :
Return on assets is an indicator of how profitable a company is relative to
its total assets. It gives an idea as to how efficient management is at
using its assets to generate earnings.
The formula for calculating return on assets is :
Return on assets = Net profit after tax / Total assets * 100

A higher ratio is more favorable to investors because it shows that the

company is more effectively managing its assets to produce greater amount
of net profit.
II.

Return on capital employed :

Return on capital employed is a financial ratio that measures a companys
profitability and the efficiency with which its capital is employed.
The formula for calculating return on capital employed is :
Return on capital employed = Net profit / Capital employed * 100

A higher ratio indicates more efficient use of capital. Return on capital

employed should be higher than the companys capital cost, otherwise it
indicates that the company is not employing its capital effectively and is
not generating shareholder value.